Ecuador State Fund Balks at 12% Rate Sought by Banks in Bond Market Return

The banking arm of Ecuador’s state- run pension fund is in talks with banks including Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) to help manage a $200-million foreign bond sale next year.

Banco del Instituto Ecuatoriano de Seguridad Social, which will use the notes to boost spending on local infrastructure projects and lending to members, said the banks are recommending an “impossible” interest rate of 12 percent, while BIESS is seeking no more than 9 percent, Chief Executive Officer Efrain Vieira said yesterday in an interview at his offices in Quito.

The bonds would be the first notes sold in international markets by a government agency since Ecuador defaulted on $3.2 billion of debt three years ago. Vieira, who manages about $7.57 billion for the country’s biggest institutional investor, said the banks want higher yields because of the perceived risk of investing in Ecuador, where the United Nations estimates about 40 percent of the population can’t meet basic needs.

“The sale would allow Ecuador to reintegrate with international markets,” said Vieira, a 47-year-old electrical engineer, who was named CEO last year after winning a public merit contest. “The banks want 12 percent, which is too expensive for me. It’s impossible to sell at that rate.”

Citigroup’s press office in Miami and JPMorgan spokeswoman Lauren Francis in New York didn’t immediately respond today to telephone messages seeking comment.

Dollar-Bond Yields

The yield on Ecuador’s dollar bonds maturing in 2015 fell three basis points, or 0.03 percentage point, to 9.64 percent at 12:02 p.m. New York time, according to prices compiled by Bloomberg. The yield has declined 233 basis points this year, while the price has gained 8.6 cents to 99.08 cents on the dollar. The country’s bonds on average yield 881 basis points more than U.S. Treasuries, according to JPMorgan’s EMBI+ index.

BIESS also is reducing its Ecuadorean government bond holdings to help spur trading for the notes in the country’s local market, Vieira said. The bank has sold $352 million so far this year and plans an additional $328 million sale immediately, he said.

“There’s a change of policy,” Vieira said. “Before, the fund waited for the paper to mature. Now the plan is to help generate a secondary market.”

There is a shortage of government debt on the local market after the central bank in July passed rules forcing financial companies to hold part of their reserves in public debt, Cesar Robalino, executive president of the nation’s private bank association, said in an Aug. 24 interview.

International Financing

Ecuador’s government has relied on financing from China and multilateral lenders like the Inter-American Development Bank as well as loans from the state pension fund to help cover budget deficits since the default.

President Rafael Correa stopped payments on $3.2 billion in bonds starting in December 2008, saying the securities were “illegitimate” and “illegal.” The government’s 2015 dollar bonds were the only global notes Correa kept servicing.

BIESS also is limiting purchases of debt from Ecuadorean companies with high import levels in a bid to support a government plan to boost the country’s trade surplus, Vieira said.

The bank plans to increase its holdings of securities sold by Holcim Ecuador SA, the local unit of Holcim Ltd., the world’s second-biggest cement producer, and supermarket chain Corp. La Favorita CA, he said.

Partnering with international banks would give the foreign bond sale “more weight,” Vieira said.

“The goal is to do something different,” he said. Help from foreign banks should give the bonds “much more weight and protection and they will be much more enticing.”